Aubrey Marblehead is conducting tests of controls on the control that quantities on Rock’s receiving reports are appropriately verified. In so doing, Marblehead has inquired of Rock’s receiving personnel, who said that they place a mark near the quantities verified and sign the receiving report upon delivery. Marblehead has decided to use non-statistical sampling for this engagement. Based on the importance of this control and the rate of deviation that has been observed in prior audits, Marblehead has established the following parameters.
Risk of overreliance ……………………. 5%
Expected population deviation rate …. 2.75%
Tolerable rate of deviation …………….. 7%
Based on the parameters established, Marblehead decides to use a sample of 100 receiving reports.
a. How would Marblehead define a deviation condition?
b. How would Marblehead appropriately define the population? What steps should be taken to ensure that it is complete?
c. If Rock has a computerized list of all receiving reports, what are some options available to Marblehead in selecting specific items for examination? What precautions should be taken before undertaking the selection of items?
d. For each of the following deviations, determine the sample rate of deviation and indicate Marblehead’s decision with respect to the functioning of the control.
1. 2 deviations.
2. 4 deviations.
3. 10 deviations.